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Debt consolidation seems like a very difficult task if you are living from paycheck to paycheck. This is a type of financial situation wherein your income is just enough to cover your monthly expenses. You do not have any extra money left over after all your financial obligations are paid off. You find yourself running out of money a few days before your paycheck. This can be a very stressful financial position because you do not have the extra money to cover any unexpected expense.

The combination of debt and living from paycheck to paycheck seems like a very difficult situation to be in. How can you afford to pay off your debts if you are hardly getting by? Well, debt consolidation can surely make things better when it comes to your debt payments. It will allow you to focus on other things because your debt repayment plan is more simple. Among the things that you should look into is how you can improve your financial situation so you are no longer living from paycheck to paycheck.

Tips to succeed in debt consolidation despite limited finances

What is great about using debt consolidation is that it requires little effort to monitor and manage. This will give you the opportunity to work on a couple of things that will hopefully have a positive effect on your finances. Obviously, if your income is barely enough to cover your expenses, there is something wrong with how you manage your finances. Do not make the mistake of thinking that all you need is a higher income to get by. It will help, that is true. However, it is not a solution.

To ensure that you are improving your financial situation while using debt consolidation, here are the things you need to look into so you can succeed are your debt relief efforts.

Budget

If you really want to get better at handling your finances, you need to start by looking at your current budget plan. You need to check both your income and expenses to find out why you are in this financial situation. Are you spending too much? Or maybe you are earning too little? Maybe your budget plan is no longer aligned with your current financial position. You need to change that and give your plan an update. List all your expenses and compare it with your income. If you find that your expenses exceed your income, you know that something has to change.

Lower spending

As you look into your budget plan, it is important for you to focus your attention on your spending. Your limited resources should prompt you to be careful with how you spend it. You need to list all your expenses and rank them according to priority. This will make it easier for you to identify the expenses that you can cut back on.

The goal here is not just to lower your spending but also to be smarter with your choices. It is the fastest way you can get extra money so you no longer have to live from paycheck to paycheck. You should also know that smart spending is one of the ways that you can guarantee success when it comes to debt consolidation.

Increase your income

If you have exhausted all your efforts to lower your spending and you are still struggling with debt consolidation, you might want to consider increasing your income. Lowering your expenses can only do so much. This can limit the improvement that your finances need to go through in order to stop living from paycheck to paycheck. Earning more will make it easier for you to build your personal net worth while you are paying off your debts. It will also help you achieve financial security a lot faster.

Stop using debt

Apparently, it is not just hard for us to keep on borrowing money. When we are in a tough and unexpected situation it can also drive us to borrow more money. A published report revealed that 4 out of 10 adults will borrow money in order to get out of an emergency expense. This is a bad idea when you are in the midst of a debt consolidation program. You have to try and avoid being put in this situation. You have to exert self-control so you will not use credit cards unnecessarily. If you cannot afford to pay for something in cash, do not spend.

It is also a good idea to have an emergency fund. That way, you do not have to resort to debt for every unexpected event that will happen in your life. You have this reserve fund to tap into if you need to pay for something important that is not in your budget.

Make sure you have the right debt consolidation strategy

Apart from trying to improve your financial situation, you should also make sure that you are using the right debt consolidation strategy. Having the wrong debt solution will still make the debt relief journey difficult and stressful. It will be hard for you to take care of the various aspects of your financial life so you can stop living from paycheck to paycheck.

There are two things that you need to ask yourself while choosing among the different debt consolidation options.

How much can you afford

First of all, you need to be honest about how much you can afford. Consolidating debts will not reduce the principal amount that you owe. You can save by lowering the interest rates but nothing will be done for the original debt that you borrowed. You have to pay it all back. If you think that downsizing your lifestyle will still make it impossible to afford to pay off your debts, then you might need a debt reduction.

What is your current credit score

You also have to consider your current credit score situation. If it is high, you can opt to borrow a loan or open a new credit card account to consolidate debt. A good credit score will help you get a low-interest rate which in turn will help you save money. However, if you have a bad score, you might want to opt for debt management instead. Both these options will consolidate debt but the effect will depend on what your credit score is.

Consolidating debts while saving for an emergency fund may be challenging – but it is not an impossible task to accomplish. You just have to be willing to make a couple of sacrifices in order to accomplish both financial goals.

Since it is already hard to save money while paying off debt at the same time, you can expect it to be more challenging if you have no idea what you should do. It will just add to the stress that you already feel because of the debt situation.

Fortunately, there are tips that you can follow to help you do both of these tasks. It may be hard but there are other people who have successfully saved money while paying off every single cent that they owe.

How to effectively save and consolidate at the same time

So how can you effectively save up for an emergency fund why consolidating debts at the same time? Here are some of the tips that can prove to be very useful in helping you get out of debt while giving your emergency savings boost.

Analyze your spending habits

According to research done by a financial institution, mindfulness may be the key to controlling your spending. The bank that initiated the research gave some customers saving challenges. Some just have to look at what they were spending on and it helped them save more. They only had to cut back on one or two purchases and they were able to save money.

If you want to save for an emergency fund and consolidate debt at the same time, you should increase the extra money that you have left after using your income to pay for basic necessities. That way, you have more cash to put into your savings without compromising the monthly debt payments that you have.

Keep your emergency fund separate

Another tip that you can use is to keep your emergency fund in a separate account. Here is a scenario that you might be able to relate with. You save up for an emergency fund. But since it is placed in an account where your other savings are, you might end up using it. When a real emergency happens, you might have less emergency money than you thought. This could force you to borrow money and add to your debt.

If you do not want that to happen, you should just set up a separate account solely for your emergency fund. That way, you will not be tempted to use it for something else.

Automate your savings

This will help you be consistent in saving up for your emergency fund. Sometimes, if you do not know that the money is being taken from your paycheck and into your savings account, the temptation to spend it goes down. You can just forget about the money and allow it to grow without you dipping your hand into it. When there is an emergency, you will be happy that you have that amount in your savings.

Use a strategy to pay your consolidated debt

Since you are saving for an emergency fund while consolidating debts, you need to use a strategy that will help you be successful. There are a couple of things that you can do. One, you can use debt management. The credit counselor that will work with you can guide you and make sure you do not miss a payment. Or you can also use refinancing to consolidate debt. Make sure it comes with a lower interest rate so you can save some money.

Do not feel bad if you can only pay the minimum amount of your consolidated debt. You can increase that amount in the future. You just have to spend a couple of months saving. Once you have enough emergency fund, you can put all your extra money towards your debt payments.

When to prioritize consolidating debts over saving

The main reason is usually a higher interest rate. If you have too much high-interest rate debt like credit cards, it makes more sense to prioritize their payments over savings. This is especially true if the debt is already in collections.

However, if you really have nothing in your emergency fund, it also makes sense to start saving up for it little by little. Obviously, your priority will be paying more than the minimum of your debt payments but that does not mean you cannot save at the same time. Even if you can only put aside a small amount, that should not deter you from saving.

So how can you afford these small savings each month?

There are a couple of ways for you to do that. One is to negotiate for a lower rate as you are consolidating debts. This is actually one of the goals of debt consolidation so it is a must that you meet this requirement. Whatever you save because of the lower interest, you can put towards your emergency fund.

You can also set up a lower monthly payment on the consolidated debts. Just negotiate this with the lender. This will lengthen your repayment period but it will give you room in your budget to save up for an emergency at the same time.

One of the goals of debt consolidation is to help improve personal finances. You have to understand, though, that it is not because of the debt relief program itself. It is more of the habits that you will learn as you pay off your debts.

The truth is, paying off your debts is not an easy thing to do. And if you use debt consolidation to get out of debt, you will not be getting any debt reduction. That means you have to pay back every single cent that you owe. This can be quite stressful and you might find it to be one of the most challenging things that you can do.

This is the reason why you need to make sure that you will end up with an improved financial future after all your efforts to get out of debt. If you have to work hard for it, you want to ensure that you can maximize the positive effects of this debt solution.

The only way to do that is to implement certain habits that will help improve personal finances after you consolidate your debts.

Life after debt consolidation is not exactly debt freedom

Let us get one thing straight. When we say after consolidating debt, this does not mean you are already debt free. There are two things that you need to remember after you have consolidated your multiple debts.

You still have to pay off your debts

Debt consolidation is a debt repayment tool. It helps you get better terms on your loan. It can be in the form of lower interest rates or lower monthly payments. The bottom line is, it will only restructure your debts. You still owe the same amount of money. More importantly, you still have to pay it all off.

Sometimes, people get a false sense of debt freedom after consolidating debts. After all, their original debts have been paid off. But you should never forget that the payment used is also debt. Now you have to pay off that new debt.

You still have to identify why you got into debt

Another truth that you have to remember is identifying what got you into debt in the first place. If you really want to improve personal finances, you need to identify what this is. Failing to do so might end up landing you in the same financial situation again.

There are man reasons why someone is in debt. Maybe you are overspending and you did not know it. Having a budget plan can solve this. Or maybe you do not have sufficient emergency funds. That means when something unexpected happens, you will be forced to borrow money in order to get past it. Once you solve the real cause of your debt situation, it will be easier for you to improve personal finances and stay out of debt.

Implement these habits to improve your personal finances

So what are the things that you need to do in order to improve your financial situation after consolidating your debts?

Assess your current financial situation

Start by assessing your financial situation. At this point, you just consolidated your debts. As explained, this does not mean you are already free from debt. You still have a long way to go when it comes to completely achieving debt freedom. With this in mind, you need to check your current budget plan. Make sure that it is aligned with the new repayment plan that you have. This will ensure that your monthly payments will be funded. Make it a priority.

Live below your means

After scrutinizing your budget plan, it is time to make a commitment to live below your means. This is also the perfect time to look at your income and expenses. See how much of your earnings go to your bills, debts, and even entertainment expenses. Maybe you can cut back on some of your expenses. According to a recent survey, Americans spend an average of $5,339 on nonessentials. This means it is not necessary for you to survive. If you have a lot of these, you might want to cut back on it. Use the money on something that can improve personal finances instead. You can also check if you can earn more. These will allow you to increase your extra money to pay more towards your debts. Not only that, but it will also give you want you to need to reach other financial goals simultaneously.

Boost your emergency fund

We mentioned that a lack of emergency funds can be a reason to land in debt. If you want to stay out of debt, you need to start saving for an emergency fund. This will ensure that if something unexpected happens, you will not be forced to borrow money. Whether it is an accident, a trip to the ER or a busted transmission, an emergency fund will help pay for these expenses without debt. This fund will also help you be more financially secure. Despite the fact that you are still in debt, this will help lower the stress that comes with paying back any money that you owe.

Commit to saving 5% of your income

The last habit that you need to implement in your life is consistently is saving a part of your income. Based on reports, there is a general increase in savings across all income levels. It seems like people are starting to understand the value of saving more.

What you have to realize is that the amount you save does not have to be a big amount. As long as you are putting away an amount in your savings every month, that will eventually grow. If you consistently save even $100 each week, that will be $400 at the end of the month. In one year, it will be $4,800. If you keep doing this for three years, you will soon have $14,400. This should be enough to help secure your financial future.

With a functional budget plan, smarter spending habits, adequate emergency funds, and increasing savings, it should be easy to improve personal finances. Combine that with your debt freedom and you will find yourself in a stronger and more positive financial position.